Yahoo Finance Graco Inc. (NYSE:GGG) Q1 2024 Earnings Call Transcript
Graco Inc. (NYSE:GGG) Q1 2024 Earnings Call Transcript April 25, 2024
Graco Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the First Quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open the conference up for questions and answers after the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2023 Annual Report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q.
These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Executive Vice President, Corporate Controller.
Christopher Knutson: Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported first quarter sales of $492 million, a decrease of 7% from the first quarter of last year. Reported net earnings decreased 5% to $122 million or $0.71 per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $113 million or $0.65 per diluted share, a decrease of 12%. The effect of currency translation had no significant impact on sales or net earnings for the quarter. The gross margin rate increased 30 basis points in the quarter.
Strong price realization and lower product costs were more than enough to offset unfavorable product and channel mix from the Industrial and Contractor segments. Total operating expenses increased $5 million or 4% in the quarter, mainly due to higher stock-based compensation and additional investment in new product development. Gross margin rate improvement was not enough to offset sales volume declines and increased operating expenses during the quarter, resulting in operating margin rate decline of 260 basis points. Interest and other expenses decreased $7 million during the quarter, driven primarily by higher interest income on cash held and lower interest expense as our long-term debt was repaid in 2023. The adjusted effective tax rate was 19.8%, which is consistent with our expected full year tax rate of approximately 19.5% to 20.5% on an as-adjusted basis.
Cash provided by operations totaled $119 million, an increase of $28 million from last year, driven mostly by favorable changes in working capital items, more than offsetting lower net earnings. Cash provided by operations as a percent of adjusted net earnings was 105%. Significant year-to-date uses of cash include dividends of $43 million and capital expenditures of $37 million, including $30 million of facility expansion projects. These cash uses were offset by share issuances of $41 million. A few comments as we look forward to the rest of the year. Based on current exchange rates, assuming the same volumes, mix of products and mix of business by currency as in 2023, movement in foreign currencies would have no impact on net sales, and a 1 percentage point unfavorable impact on net earnings for the full year.
Finally, our full year estimates for unallocated corporate expense and capital expenditures remain unchanged and can be found in the conference call slide deck on Page 9. I'll now turn the call over to Mark for further segment and regional commentary.
Mark Sheahan: Thank you, Chris. Good morning, everyone. All of my comments this morning will be on an organic constant currency basis. We began the year softer than expected with revenue declines across all segments, driven by weakness in semiconductor, process transfer equipment, liquid finishing, and sealant and adhesive systems sales. Contractor North America also started the year slow, but as the quarter progressed, our incoming order rates improved. Despite these challenges, both our lubrication and powder equipment finishing systems grew during the quarter. And regionally, EMEA Contractor improved with robust sales in spray foam and protective coatings, along with an improved Pro paint channel. Volume declines put some pressure on margins in the quarter, but we were happy with the resilience in our gross margin rate, reflecting positive price/cost relationships, while maintaining operating margins for each segment at or greater than 29%.
At the end of the quarter, our consolidated backlog was $285 million, which is $5 million higher than at the beginning of the year, but was $65 million below the first quarter of last year. The increase resulted from the improving incoming order trends we saw at the end of the quarter, which have extended into April. Now turning to some commentary about our segments. The Contractor segment was down 6% against a strong first quarter comp last year. EMEA was a bright spot with strong Pro paint, spray foam and protective coatings markets. North America was heavily impacted by the timing of this year's new product releases, which will primarily be in the second quarter. Feedback from the channel has been positive, and we're excited to start shipping orders of these products as they're fully released.
Incoming order rates steadily improved as the quarter progressed, which gives us optimism that we can rebound from the soft start and see some growth. Backlog was up $10 million compared to the end of last year. Operating margins held up at 29% despite the lower sales volumes. The Industrial segment declined 5% during the quarter. We continue to have weakness in the Asia Pacific construction markets and had a slow start globally in the liquid finishing and sealant and adhesive systems businesses. Powder coatings systems sales were strong, but were not enough to offset these declines. The battery, alternative energy, packaging and e-mobility markets remain positive, and we have generally seen good coating activity in our key end markets. Operating margins were impacted by the overall decrease in sales volume, revenue mix and higher product development spending.
Moving to the Process segment. Sales were down 10% compared to the same quarter last year. This segment is coming off of three years of strong results with broad-based growth across all product categories. During this period, operating earnings grew from 21% in the first quarter of 2020 to 29% this quarter despite the softer sales volume. We continue to see growth in the quarter for the lubrication business, but that was more than offset by a decline in both semiconductor and process transfer equipment sales. Our semiconductor backlog is decent as we did see order rates improve as we exited the quarter and into the first few weeks of April. We are experiencing shipping delays of products headed into China due to enhanced license requirements.
While order rates have improved, we do expect continued headwinds in semiconductor products for the remainder of the year. Moving to our outlook. January and February bookings were lower than the same period last year. However, bookings for March and the first three weeks of April are up nicely, resulting in flat year-to-date orders. This supports our outlook despite the 7% revenue decline in the quarter. In addition, our new products, especially in Contractor, are exciting and should provide incremental sales when compared to 2023. Our teams are fully engaged and remain focused on delivering another year of growth in sales and earnings. We are reaffirming our full year revenue guidance of low single-digit growth on an organic constant currency basis.
That concludes the prepared remarks. I'll turn it over for questions.
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